June 23, 2018
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J.C. Penney ousts CEO; former boss returns to helm

By Phil Wahba, Reuters

Attention J.C. Penney shoppers: Meet the new boss. Same as the old boss.

The struggling department store chain parted ways with Chief Executive Ron Johnson, who failed to win over shoppers and investors with his everyday-low-price strategy, and on Monday rehired Johnson’s predecessor, former CEO Myron Ullman, to revive the company.

Johnson’s botched transformation led to a 25 percent decline in sales last year, with the bleeding worsening each quarter. Shares in J.C. Penney rose nearly 11 percent in afterhours trade after a CNBC report that Johnson was out, but then fell 6.2 percent to $14.88 after Penney disclosed Ullman’s return.

“Certain investors had beaten the drum saying that a change was needed and Johnson wasn’t the guy,” said William Frohnhoefer, an analyst at BTIG, who added investors have concerns about Ullman. “All the criticism they had leveled at the company before is going to be resuscitated now.”

Johnson, previously a well-regarded retailer who pioneered the “cheap chic” concept at Target Corp. in the 1990′s before building Apple Inc’s retail chain, had promised at the start of his stint to remake Penney into “America’s favorite department store.”

He tried to breathe new life into the 111-year-old chain by replacing its traditional coupons and sales events with everyday low prices. He also carved the retailer’s larger locations into collections of branded boutiques for the likes of Joe Fresh, Jonathan Adler and Martha Stewart. Johnson had plans for 100 such shops at Penney’s 700 locations.

While the shop-in-shops have shown promising results, Penney’s price sensitive, deals-obsessed shoppers balked at Johnson’s pricing strategy, which he did not bother to test.

Ullman told Reuters in an interview that his first step as returning CEO would be to take a close look at Penney’s books before making any decisions about whether he would forge ahead with Johnson’s shop plan or stop it.

“What’s worked well so far is having some attractions within each area,” Ullman said.

At the end of fiscal 2012, Penney had $930 million in cash, some $577 million less in cash than a year earlier, despite selling off a number of assets and cutting nearly $1 billion in expenses. Still, he noted, there was something to be said for making the stores more interesting.

Surprise return

Johnson’s ouster had been the object of intense speculation for weeks, but Ullman’s return was a surprise, considering how harshly his tenure had been condemned by Penney’s largest shareholder, hedge fund manager Bill Ackman, who handpicked Johnson and backed his vision.

In a May 2012 presentation, Ackman’s Pershing Square called Penney “chronically mismanaged” and noted the stock’s declines during Ullman’s tenure. Its shares fell about 15 percent while he was CEO from 2005 to 2011. Still, when Ullman left, the share price was double Monday’s price.

Ullman said Ackman’s criticism was not “entirely balanced” given how hard the 2007-2009 recession hit Penney’s customers.

Ackman could not be reached for comment on the latest changes at Penney. The hedge fund manager did acknowledge last week that the CEO had made “big mistakes,” and that the impact of those mistakes had been “very close to a disaster” for the retailer.

At least one retail expert said Ullman’s return might presage a sale of the retailer.

“The only reason why I would name Ullman as the CEO would actually be as a temporary fix just because he does know so many people inside the company, and they have faith in them,” said Brian McGough, managing director and head of the retail group at Hedgeye Risk Management. “He could calm waters and he could help to put lipstick on the pig and get it sold.”

The latest change in the corner office is expected to cast a harsh light on the board ahead of Penney’s annual meeting on May 17 in Plano, Texas, one corporate governance expert said.

“When you get a board that keeps making errors like that, then you start to lose faith not just in the CEO but in the board as well,” said Paul Hodgson, an independent corporate governance analyst in Camden, Maine.

Analysts expect shares to be under pressure while Ullman tries to stem the bleeding, especially if that means changing gears abruptly again.

“This is like (Tesla co-founder) Elon Musk announcing that Tesla (maker of the first electric car) is changing gears and will now focus on gas-powered vehicles,” said David Tawil, whose hedge fund Maglan Capital had bet Penney’s stock would fall.

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